2022 (5) TMI 1343 - AT - Income Tax

Rectification u/s 154 - adjustment towards prior period expenditure by way of rectification resulting in increase in the assessed income - HELD THAT - We find palpable merit in the plea of the assessee that there is no bar per se for claim of prior period expenses as revenue expenditure in appropriate factual matrix in the light of the decision of the Hon ble Supreme Court in the case of CIT vs. Hero Cycles Pvt. Ltd. 1997 (8) TMI 6 - SUPREME COURT . The Hon ble Delhi High Court in the case of CIT vs. Jagjit Industries Ltd. 2010 (9) TMI 58 - DELHI HIGH COURT has held that the claim of prior period expenses is permissible in the given factual matrix. On a broader reckoning it is plain and simple that mere claim of prior period expenses in a relevant assessment year cannot be disallowed outright without examining the factual matrix. - in the case of Hero Cycle (supra) has inter alia observed in paragraph 3 of the judgment that Rectification under section 154 of the Act can only be made when glaring mistake of fact or law has been committed by the officer passing the order becomes apparent from the record. Rectification is not possible if the question is debatable. Moreover the point which was not examined on facts or in law cannot be dealt as mistake apparent on the record. The dispute raised a mixed question of fact and law. Thus the action of the Assessing Officer is clearly without jurisdiction to invoke Section 154 of the Act with a view to engage in making adjustments on such debatable issues in an abstract manner. The action of the Assessing Officer is thus without sanction of law and requires to be reversed. Increase in the assessed income on account of provision for leave encashment outstanding as on date of filing of return - We concur with the contentions raised on behalf of the assessee without any demur. The Assessing Officer could not have enhanced the assessed income towards provision for leave encashment by way of rectification under Section 154 of the Act at the relevant time contrary to judgment rendered by Hon ble Calcutta High Court . 2007 (6) TMI 175 - CALCUTTA HIGH COURT under Section 154 of the Act. The action of the Assessing Officer is thus reversed and position of the assessee is restored. Appeal of assessee allowed.

Summary

Issues:
1. Adjustment towards prior period expenditure under Section 154 of the Income Tax Act, 1961.
2. Increase in assessed income due to provision for leave encashment outstanding.

Issue 1 - Adjustment towards Prior Period Expenditure:
The appeal was filed against the Commissioner of Income Tax (Appeals) order concerning the prior period expenditure adjustment and provision for leave encashment outstanding for AY 2012-13. The assessee challenged the adjustments under Section 154 of the Act. The Assessing Officer increased the assessed income for prior period expenses, but the tribunal found merit in the assessee's plea. The tribunal referred to legal precedents such as the decisions of the Supreme Court and various High Courts to support the claim of prior period expenses as permissible business expenditure. The tribunal emphasized that rectification under Section 154 can only be made for glaring mistakes of fact or law, not for debatable issues. Therefore, the tribunal held that the Assessing Officer's action was without jurisdiction and reversed it.

Issue 2 - Provision for Leave Encashment Outstanding:
The second issue involved an adjustment of Rs.3,32,350 for provision for leave encashment under Section 154 of the Act. The assessee argued that the Assessing Officer, at the time of rectification, could not take a view inconsistent with the judgment of the Calcutta High Court regarding the validity of Section 43B(f) governing leave encashment. Despite the subsequent Supreme Court decision upholding the validity of Section 43B(f), the Assessing Officer's action was deemed inconsistent with the Calcutta High Court's judgment. The tribunal agreed with the assessee's contentions, stating that the Assessing Officer could not enhance the assessed income based on a view contrary to a High Court judgment under Section 154 of the Act. Consequently, the tribunal reversed the Assessing Officer's action and restored the position of the assessee.

In conclusion, the tribunal allowed the appeal of the assessee, emphasizing the importance of adhering to legal precedents and the limited scope of rectification under Section 154 of the Income Tax Act, 1961.